Benefits Monthly Minute
In IRS Notice 2020-68, the IRS recently provided significant guidance in the form of questions and answers with respect to certain provisions of the SECURE Act, which we previously examined in the February 2020 Legal Alert. Of note, the Notice addresses the eligibility for long-term, part-time employees, the qualified birth or adoption distribution, and the small business credit for establishing an EACA under the SECURE Act, as well as the deadline for plan amendments.
Eligibility for Long-Term, Part-Time Employees: The Notice examined Section 112 of the SECURE Act, which requires 401(k) plans to allow long-term, part-time employees (who are age 21 with 500 hours of service for 3 consecutive years) to participate. In addition to requiring that elective deferrals be permitted by long-term, part-time employees, this section provides special vesting rules, such that long-term, part-time employees must be credited with a year of service for each 12-month period during which the employee completes at least 500 hours of service. In this regard, the Notice specifies that all years of service must be taken into account for vesting purposes, and the exception for periods preceding January 1, 2021, which applies for purposes of elective deferral eligibility, does not apply for vesting purposes. Therefore, unless a long-term, part-time employee’s years of service may be disregarded because it was service before the employee attained age 18 under § 411(a)(4), all years of service with the employer must generally be taken into account for purposes of determining the employee’s nonforfeitable right to employer contributions, including 12-month periods beginning before January 1, 2021.
KMK Comment: In light of these new vesting credit rules, plan sponsors may wish to consider whether employer contributions will be available to part-time employees in order to streamline their plan administration and avoid the complications these new rules create.
Qualified Birth or Adoption Distributions: The scope of the SECURE Act’s newly added exception to the 10% additional tax for qualified birth or adoption distributions (QBADs) was also explored in depth. Among other important points, the Notice specifies the following:
- QBADs up to $5,000 may be made during the 1-year period beginning on the date the child is born or adopted (with respect to an eligible adoptee).
- The child’s (or eligible adoptee’s) name, age and TIN must be included on the individual’s tax return for the year in which the QBAD is made.
- QBADs may (but are not required to) be made from a 401(k) plan, 401(a) plan (other than defined benefit plans), 403(a) annuity plan, 403(b) annuity contract, 457(b) governmental plan, or an IRA.
- An eligible adoptee includes any individual who has not attained age 18 or is physically or mentally incapable of self-support; an eligible adoptee does not include an individual who is the child of the taxpayer’s spouse.
- Each parent may receive a QBAD of up to $5,000 with respect to the same child or eligible adoptee.
- An individual is permitted to receive QBADs with respect to the birth/adoption of more than one child if the distributions are made during the 1-year period following the date on which the children are born or the legal adoption is finalized.
- An individual may recontribute any portion of a QBAD (up to the entire amount) to an applicable eligible retirement plan in which the individual is a beneficiary and to which a rollover can be made. Further, if an applicable eligible retirement plan permits QBADs, it is generally required to accept a recontribution of that distribution to the plan.
- A QBAD recontribution made from an applicable eligible retirement plan is treated as the direct transfer of an eligible rollover distribution.
- A plan is permitted to rely on reasonable representations from the individual when determining whether an individual is eligible for a QBAD absent actual knowledge to the contrary.
- A QBAD is not treated as an eligible rollover distribution for purposes of the direct rollover rules of § 401(a)(31), the notice requirement under § 402(f), and the mandatory withholding rules under § 3405. Thus, the plan is not required to offer an individual a direct rollover, a § 402(f) notice is not required, and there is no requirement to withhold 20% of the distribution.
- If an applicable eligible retirement plan does not permit QBADs and an individual receives an otherwise permissible in-service distribution that meets the QBAD requirements, the individual may treat the distribution as a QBAD on the individual's federal income tax return. The distribution, while includible in gross income, is not subject to the 10% additional tax under § 72(t)(1). If the individual decides to recontribute the amount to an eligible retirement plan, the individual may recontribute the amount to an IRA.
KMK Comment: QBADs will likely become a popular form of in-service distribution and the IRS’ clarifications provide much-needed guidelines for plan administration. Plan sponsors who choose to offer QBADS should work with their record-keepers to coordinate the implementation.
Small Business Credit for Establishing an EACA: Section 105 of the SECURE Act provides a $500 business credit under § 38 of the Code for an “eligible employer” (generally, under 100 employees) that establishes an eligible automatic contribution arrangement (EACA) under a qualified employer plan. IRS Notice 2020-68 clarifies that:
- An eligible employer may receive a credit for taxable years only during a single 3-year credit period that begins when the employer first includes an EACA;
- To be eligible for the credit for the 2nd or 3rd taxable year of the 3-year credit period, the employer must include the same EACA in the same plan for the 2nd and 3rd taxable year; and,
- The credit applies separately to each eligible employer that participates in a multiple employer plan (MEP).
KMK Comment: The Notice serves to close possible loopholes with respect to the $500 business credit, and gives an indication that the IRS may intend to narrowly construe the credit.
Amendments: Lastly, IRS Notice 2020-68 reiterates that under Section 601 of the SECURE Act, a retirement plan must be amended to reflect the provisions of the SECURE Act, and the amendment must be adopted no later than the last day of the first plan year beginning on or after January 1, 2022 (or 2024 for governmental or collectively bargained plans). The notice further clarifies that the deadline to amend applies to both required and discretionary plan amendments.
KMK Comment: Amendments are not needed at this time. In light of the IRS request for comments on this Notice by November 2, additional IRS guidance including regulations should to be forthcoming. KMK will continue to monitor additional guidance as it becomes available.
The KMK Law Employee Benefits & Executive Compensation Group is available to assist with these and other issues.
KMK Employee Benefits and Executive Compensation email updates are intended to bring attention to benefits and executive compensation issues and developments in the law and are not intended as legal advice for any particular client or any particular situation. Please consult with counsel of your choice regarding any specific questions you may have.